BGSF(BGSF) - 2021 Q2 - Quarterly Report

Part I - Financial Information Financial Statements The company reported a $3.3 million net loss for the 26 weeks ended June 28, 2020, driven by a $7.2 million impairment and COVID-19 impacts, despite growth from the $21.7 million EdgeRock acquisition Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Unaudited) | Account | June 28, 2020 ($) | December 29, 2019 ($) | | :--- | :--- | :--- | | Total Assets | $126,955,730 | $115,586,044 | | Goodwill | $31,372,990 | $25,194,639 | | Intangible assets, net | $36,441,098 | $33,807,973 | | Total Liabilities | $65,232,996 | $47,129,054 | | Long-term debt | $29,675,000 | $7,500,000 | | Total Stockholders' Equity | $61,722,734 | $68,456,990 | - The increase in assets and liabilities is primarily due to the acquisition of EdgeRock, which added goodwill, intangible assets, and was financed through increased long-term debt[12][13][75] Consolidated Statements of Operations Statement of Operations Highlights (Unaudited, in thousands) | Metric | Q2 2020 ($ thousands) | Q2 2019 ($ thousands) | 26 Weeks 2020 ($ thousands) | 26 Weeks 2019 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $62,606 | $73,858 | $136,674 | $142,634 | | Gross Profit | $16,905 | $20,863 | $37,181 | $39,301 | | Impairment Losses | $7,240 | $0 | $7,240 | $0 | | Operating (Loss) Income | $(6,085) | $5,421 | $(3,427) | $9,007 | | Net (Loss) Income | $(4,829) | $3,802 | $(3,330) | $6,298 | | Diluted EPS | $(0.47) | $0.37 | $(0.32) | $0.61 | - A significant $7.2 million impairment loss was recognized in Q2 2020, leading to a substantial net loss for both the quarter and the half-year, compared to profits in the prior year[15][53] - Cash dividends declared per common share were reduced to $0.05 in Q2 2020 from $0.30 in Q2 2019[15] Consolidated Statements of Cash Flows Cash Flow Summary (Unaudited, for the 26 weeks ended, in thousands) | Activity | June 28, 2020 ($ thousands) | June 30, 2019 ($ thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $15,102 | $9,162 | | Net cash used in investing activities | $(23,577) | $(674) | | Net cash provided by (used in) financing activities | $8,476 | $(8,489) | - Cash used in investing activities surged to $23.6 million due to the $21.7 million cash payment for the EdgeRock acquisition[23][75] - Financing activities provided $8.5 million in cash, primarily from $22.5 million in new long-term debt, which was used for the acquisition and to pay down the line of credit[24][92] Notes to Financial Statements Notes detail the company's three segments, the significant impact of COVID-19, the $21.7 million EdgeRock acquisition, a $7.2 million impairment charge, and subsequent debt and dividend actions - The company operates in three segments: Real Estate, Professional, and Light Industrial. The Professional segment was expanded through the acquisitions of L.J. Kushner and EdgeRock Technology[26][28][114] - On February 3, 2020, the company acquired EdgeRock for $21.7 million in cash, funded by its credit facility. The acquisition contributed approximately $16.3 million in revenue and $0.6 million in operating income in the first twenty-six weeks of 2020[75][77] - Due to revised long-term projections impacted by market conditions, the company recognized a $7.2 million impairment loss in the Professional segment during Q2 2020, comprising a $3.7 million trade name impairment and a $3.5 million client partner list impairment[53][87] - Subsequent to the quarter end, on August 4, 2020, the board declared a cash dividend of $0.05 per share[117] Management's Discussion and Analysis (MD&A) Management attributes the Q2 revenue decline to COVID-19 impacts on Real Estate and Light Industrial segments, offset by Professional segment growth from acquisitions, while a $7.2 million impairment charge led to an operating loss and Adjusted EBITDA decline Overview and COVID-19 Impact - The company operates 89 branch offices and 12 on-site locations across 44 states and D.C., providing workforce solutions in Real Estate, Professional, and Light Industrial segments[120] - The COVID-19 pandemic has had a negative impact on operating results, including reduced demand for services, hiring freezes, and early project terminations. The company has implemented cost containment and liquidity actions in response[125][126][127] Results of Operations Q2 2020 revenues declined 15.2% to $62.6 million, resulting in a $4.8 million net loss due to a $7.2 million impairment and segment declines, despite Professional segment growth Q2 2020 vs Q2 2019 Revenue by Segment (in thousands) | Segment | Q2 2020 Revenue ($ thousands) | Q2 2019 Revenue ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Real Estate | $11,780 | $24,397 | (51.7)% | | Professional | $36,649 | $31,321 | 17.0% | | Light Industrial | $14,177 | $18,140 | (21.8)% | | Total | $62,606 | $73,858 | (15.2)% | - The increase in Professional segment revenue was primarily driven by the LJK and EdgeRock acquisitions, which contributed $9.8 million of new revenue in Q2 2020[133] 26 Weeks 2020 vs 26 Weeks 2019 Revenue by Segment (in thousands) | Segment | 26 Weeks 2020 Revenue ($ thousands) | 26 Weeks 2019 Revenue ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Real Estate | $31,808 | $43,573 | (27.0)% | | Professional | $72,994 | $61,915 | 17.9% | | Light Industrial | $31,872 | $37,146 | (14.2)% | | Total | $136,674 | $142,634 | (4.2)% | - A $7.2 million impairment loss was recognized in the Professional segment due to changes in long-term projections, significantly impacting profitability[142][154] Non-GAAP Measures: Adjusted EBITDA - The company uses Adjusted EBITDA, a non-GAAP measure, to evaluate operating performance. It is defined as earnings before interest, taxes, depreciation, amortization, impairment losses, transaction fees, IT roadmap costs, and share-based compensation[156][157] Adjusted EBITDA Reconciliation (in thousands) | Metric | Q2 2020 ($ thousands) | Q2 2019 ($ thousands) | 26 Weeks 2020 ($ thousands) | 26 Weeks 2019 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Net (Loss) Income | $(4,830) | $3,802 | $(3,331) | $6,298 | | Adjustments | $8,102 | $3,074 | $11,869 | $5,738 | | Adjusted EBITDA | $3,272 | $6,876 | $8,538 | $12,036 | Liquidity and Capital Resources - Primary liquidity sources are cash from operations and borrowings under the BMO credit facility. The company believes these sources are sufficient for working capital needs for the next twelve months[163] - In H1 2020, the company borrowed $22.5 million on its Term Loan to fund the EdgeRock acquisition, reduced its Revolving Facility by $10.1 million, and paid $3.6 million in dividends[171] - In April 2020, the company entered into a $25.0 million interest rate swap agreement to hedge the floating interest rate on its Term Loan, effective June 3, 2020[175] Market Risk The company's primary market risk is interest rate fluctuations on variable-rate debt, mitigated by an interest rate swap agreement - The company is exposed to interest rate risk because portions of its debt are priced at variable rates. Future rate increases could adversely impact earnings and cash flows[178] Controls and Procedures Management concluded disclosure controls were ineffective as of June 28, 2020, due to a material weakness in goodwill and intangible asset impairment assessment, with remediation efforts underway - Management identified a material weakness in internal control over financial reporting related to the quantitative assessment of impairment for goodwill and intangible assets[181] - The CEO and CFO concluded that due to this material weakness, the company's disclosure controls and procedures were not effective as of June 28, 2020[180] - Remediation steps are underway, including recruiting additional personnel, retaining external experts, and enhancing management review controls[183] Part II - Other Information Risk Factors The company highlights significant and ongoing risks from the COVID-19 pandemic, including reduced demand, client payment issues, and economic disruptions, which adversely impact operations - The company's business and financial results have been, and may continue to be, materially and adversely impacted by the COVID-19 pandemic[189] - Specific impacts include reduced demand for services, early project terminations, hiring freezes, and potential client payment defaults or deferrals, which could materially impact liquidity[190] Other Part II Items No material changes were reported for Legal Proceedings, Unregistered Sales of Equity Securities, Defaults Upon Senior Securities, or Other Information - Item 1, Legal Proceedings: No change from the Annual Report on Form 10-K for the fiscal year ended December 29, 2019[187] - Items 2, 3, 5: The company reported 'None' for Unregistered Sales of Equity Securities, Defaults Upon Senior Securities, and Other Information[191]